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Fitch Warns Of "Historic Junk Milestone" As US Defaults Surge

Tyler Durden's picture




 

Despite the rear-view-mirror-gazing optimists proclamations that default rates have been low (which matters not one jot when pricing the future expectations of default into corporate bond cashflows), Fitch just released its forecast for 2016 defaults and notes that more than $5.5 billion of December defaults has increased the trailing 12-month default rate to 3.3% from 3% at the end of November, marking the 13th consecutive month that defaulted volume exceeded $1.5 billion, closing in on the 14-month run seen in 2008-2009.

"Investors are taking note that the lower-for-longer oil price scenario doesn't look like it's going away anytime soon," said Eric Rosenthal, Senior Director of Leveraged Finance.

 

Corporate spreads for 'CCC' credits exceeded 1,600 bps on Friday for the first time since summer 2009. Energy and metals/mining compose $84 billion of the 'CCC' rating category. Spotty capital markets access for these companies has led to decreased issuance, and pricing suggests distress will continue.  Of 'CCC' rated energy and metals/mining companies, 88% are bid below 80 cents.

 

So far this month the energy TTM default rate climbed to nearly 7%. Vantage Drilling's chapter 11 filing and Magnum Hunter Resources and Swift Energy's missed payments pushed the E&P TTM default rate close to 12%.

 

Distressed debt exchanges (DDEs) accounted for 44% of defaults on an issuer-count basis in the past year. Energy companies have relied on DDEs to improve their capital structure and buy time as liquidity and cash flows are affected by low oil prices. Several companies including SandRidge Energy, Halcon Resources, Warren Resources and Exco Resources have completed multiple DDEs.

Fitch Ratings forecasts the 2016 US high yield bond default rate at 4.5% as weak prices will continue to challenge energy and metals/mining issuers. The energy sector default rate is projected to hit 11% in 2016, eclipsing the 9.7% rate seen in 1999.

A 4.5% 2016 high yield default rate equates to $66 billion of defaults and would be the fourth highest default total since 2000.

This would be close to the $78 billion amassed in 2001 but well below the record $119 billion posted in 2009. At the beginning of December, $98 billion of the high yield universe was bid below 50 cents, while $257 billion was bid below 80 cents.

While Moody's 2016 default forecast is 3.8%, and Fitch now forecasts 4.5% but the relationship with the ratio of money-losing firms now suggests something much higher, and we watch that outcome as a risk.

As Credit Suisse warned,

This is not a forecast, but an observation and a watching point. With the ECB now apparently less friendly as we examine below, we become more cautious ahead of the presumed Fed hike on 16 December, particularly in terms of total return dynamics.

 

Ironically, if defaults were to rise to anything like the degree this analysis suggests, it might abort the Fed hiking cycle which is a source of concern for the credit market. But we would hardly take this as a reassuring outcome.

 

There is a theme at present that credit is leading other markets, and is predicting "recession." We are worried...

 

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Mon, 12/14/2015 - 15:32 | 6922653 SILVERGEDDON
SILVERGEDDON's picture

Too much junk in the trunk don't work out very well.

Bad enough on women, much less the market.

Big fucking pile of credit default swaps and derivatives teetering on full mudslide alert, too.

Mon, 12/14/2015 - 15:34 | 6922669 knukles
knukles's picture

Watch out my equity brethren.  High yield and bonds are the best precursors of the future .... y'all know (but won't admit) stawlks are laggards compared to bonds!
Spreads widen .... check, High Yield .... check High Grade
Quality will follow with a rally ... like long Treasuries
                                            Equities claim a sucker punch ... "Nobody coulda seen it coming!"

Mon, 12/14/2015 - 15:53 | 6922750 Junerberno
Junerberno's picture

Cheeks  widen- check.

Mon, 12/14/2015 - 15:31 | 6922654 aliki
aliki's picture

translation = start setting your bids & get ready to become a scaled-buyer of HYG & JNK. these things have already gotten torn apart & this forced selling brings-about a massive buying opportunity. nothing says "distressed sellers" in the water like the last 2 days candles on both HYG & JNK.

Mon, 12/14/2015 - 15:31 | 6922655 Mark Mywords
Mark Mywords's picture

121515=ISISIS

That is all.

Mon, 12/14/2015 - 15:43 | 6922701 I AM SULLY
I AM SULLY's picture

Good catch ...

(I thought the "Hunger Games" people were telling me something else)

"915"

https://www.youtube.com/watch?v=PPcormivj2A

http://iamsully.com/?p=14709

Mon, 12/14/2015 - 15:46 | 6922721 Kilgore Trout
Kilgore Trout's picture

It all depends on what the meaning of 12 15.

Mon, 12/14/2015 - 15:32 | 6922656 madcows
madcows's picture

Yeah, these appraisers are so good, they can read a collapse 10 years in the past.

Mon, 12/14/2015 - 15:33 | 6922659 agstacks
agstacks's picture

Sounds like Fitch is due for some "regulatory compliance actions" 

Mon, 12/14/2015 - 15:43 | 6922705 firstdivision
firstdivision's picture

Energy defaults has barely begun. This is the panic before the storm. 

Mon, 12/14/2015 - 15:51 | 6922742 Citxmech
Citxmech's picture

So when does the credit default swap market start to collapse?

Mon, 12/14/2015 - 15:57 | 6922770 jakesdad
jakesdad's picture

well, if yellen follows through on her hints we should be hearing a "plop" & "splash" eminating form a punchbowl near you in a couple days...

Mon, 12/14/2015 - 15:44 | 6922707 I AM SULLY
I AM SULLY's picture

It's all going down the tubes ...

Mon, 12/14/2015 - 15:55 | 6922761 venturen
venturen's picture

which billionaires am I rescuing? Does Corzine need a rescue? What about Buffet or Dimon...do they need my money? Why even bother having a department of treasury printing money...just let the individual banks.

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